Stop Loss / Wool / Eyes?

Beginner Questions
#1

Hi,

First of all I will admit I have joined this forum specifically to get an answer to my question, but now that I have had a little look around I realise that it could be quite useful - so no doubt I will be a regular user.

I have only recently started Forex trading, previously only having been generally interested, but recently, with a little more disposable income, I decided to take the plunge and try and see if I could actually make any money. So that I did not make an absolute pigs ear of it I only invested a small amount so that I could begin to understand the volumes and ratios that I would need to juggle and to get an idea of what my potential returns could be relative to my orders.

I had been happily trading for just a couple of weeks when recently I had to take a big step back. I had assumed that a Stop Loss order was unequivocal - my safeguard if you like. However, it appears not;

Using my Forex company’s web site and trading EUR/USD, I opened a position on 1/4/2016 at 11:04. At 11:08 I set a Stop Loss limit at 1.13956 and gradually lifted this limit up, until 12:19 when I set it at 1.14140, knowing that at this stage I was “in the money”.

At 12:30 the system auto-executed the Stop Loss but at the lower rate of 1.14067, resulting in a loss on the position.

After querying this with my broker he explained that as the period in question was during a major market announcement (it was), and the market moved very rapidly down (it did) the Stop Loss process could not “catch” the drop and gave the next available rate.

As a total novice in the Forex market my only question is “Is the wool being pulled over my eyes or not ?”

Thanks,

#2

The 6.3 pips difference is probably the brokers spread between the buying and selling price, although it does seem very wide for that pair even allowing for slippage. My broker spread is 1.5 to 2 pips usually. Without seeing your trading screen its hard to know how yours is set up, can you do a screenshot?

#3

Eddieb,

Thanks for the quick reply.

Before I send a screen shot, can I ask if it is good practice/protocol to reveal trading companies names etc.

Also, in relation to your reply, I do not think that this has anything to do with the brokers fees/spread as I had been using stop loss with predicable results up until this point, and after.

Thanks,

#4

This is the nature of the markets during major economic or news releases. Remember that a stop is a limit order that turns into a market order when the price you choose is marked. A market order is executed at the “best available price” and if there is no one to take the other side of your trade at your limit price, they’ll go to the “next best price” offered/bid. In periods of high volatility, that could be 10, 20, 50 pips away from your limit price because during major news events, many traders sit on the sidelines to limit risk, so there are less than usual orders around to soak up market orders, resulting in fast moves.

If you didn’t know any of this before today, you definitely should go through the School to get the fundamental skills and knowledge down before practicing this business. It’ll definitely shorten the time it takes to developing something that works for you rather than jumping right in. Hope this helps… good luck!

#5

Pipcrawler,

That certainly makes sense, but I was assuming that enabling me to set a SL limit meant exactly that, not that it would be the point at which an order is offered. I assumed that it would be honoured by the company I am trading with.

Thanks for the advice.

#6

You may want to search on here for a thread Jan 2015 about the Swissy / CHF. Basically, they Swiss government unlinked their currency from the Euro without warning and the forex market went mental, some pairs dropped 100s of pips in minutes. Brokers couldn’t complete sell orders/stops because no one wanted to take the other side of the trade. This resulted in many traders losing their entire account and some brokers going bust

#7

Eddieb,

It is beginning to make more sense now.

#8

FXCM has done research that shows traders trading during the New York session ( 8am to 2pm est) loose more trades then traders who trade during other times, this is because this period of time is full of news announcements that can spike the market and cause wide spreads for a few minutes. If you are trading in a way that a few pips is difference between winning and loosing, then you must be aware of these new events.

#10

I have had the same thing happen to me, especially during high impact events. My assumption at the time was that the broker server was simply too busy to execute my order. It never occurrred to me that it could’ve been because there was no one to take the other side of the trade. Either way, I don’t trade these events anymore.

#11

yes, brokers can use only prices which are actually available in the market:
an example:
you have bought smth (potatoes) for 30 USD and set SL to 25
however the price goes as following: 32 -> 29 -> 26 -> 22
Your order will be closed at 22 because 25 USD price was not available.
So to conclude- no, stop loss level cannot guarantee anything, and it’s not a matter of “honouring” the deal. Hope I have managed to clarify some things.

#12

Brokers would lose profit if they did so. If no one was buying at that price of your Stop Loss it would be as if the broker would automatically purchase your declining assest and then sell themselves at a loss. That would make 0 business sense.

#13

Hi,

Thanks everyone for their feedback.

I have just had a call from my broker and, as a one-off gesture to reflect my beginner status (read stupidity) he is willing to credit my account to effectively guarantee my original Stop Loss position. This has halved my loss and, although we are not talking thousands of euros here, it was the principle that was more important for me. As this is a great gesture I would like to thank him by recommending Cedric at iForex.

#14

Another factor at play is volatility. New traders are often drawn to the action of the New York and London sessions, but the stats show many are better off trading during the quieter Asian Session.

There’s a lot going on in this chart but the pattern should be fairly clear: on average, traders saw considerably higher chances of ultimately turning a profit if a trade was opened in certain hours over others.

[B]Likelihood of Trader Profitability by Hour of Day in Top 5 Currency Pairs, Q2, 2014 – Q1, 2015 [/B]

Our data on real trader behavior suggest that most traders tend to follow a somewhat straightforward strategy: Range Trading or Mean-Reversion trading. Put simply, such a technique is broadly defined as buying when prices are low/at support and selling when prices are high and/or at resistance.

Range Trading can work if price is not breaking major price levels and continues trading within relatively narrow ranges, and indeed this is typically the case during the quieter Asian Session hours.

#15

A stop order becomes a market order when it’s trigger price is reached or exceeded. That means it gets executed at the next available price, as the broker said. The kind of “slippage” you experienced is the sort that can happen in higher volatility periods such as around major news events.

#16

Things like this are happening lot of time with different brokers in such a events, so just get over it and move on.